Korean economy feared to see zero growth amid stalled innovation

The low-growth trend in the South Korean economy may prolong, deeper, amid the lack of next-generation mainstay industry taking over chips, coupled with the country’s record-low birthrate, economists warned Sunday.

According to a recent report by the Korean Economic Association obtained by Maeil Business Newspaper on Sunday, the Korean economy is facing a decline in productivity as innovative industries needed to fuel growth after the semiconductor industry have become scarce since 2010. The report was written at the request of the National Economic Advisory Council.

According to the report, Korea’s total factor productivity contribution to economic growth stood at minus 4 percent in 2010, undermining growth, while that of the U.S. reached as high as 45 percent.

Korea’s record-low birthrate and aging population, which are progressing at the fastest pace in the world, are also fueling low growth, according to the report.

The Korea Economic Association predicted that labor shortage will worsen in 2030, with a negative labor growth rate of 0.39 percent.

Based on Statistics Korea’s future population estimates, the country’s gross domestic product (GDP) is projected to expand 1.68 percent in 2030 before falling to the zero percent range (0.97 percent) in 2040.

The growth rate is also projected to decline further to 0.89 percent in 2050 and 0.44 percent in 2060.

The rate of decline in potential growth, which is the growth rate achievable without causing inflation, is even steeper. According to Maeil Business Newspaper’s analysis of data from the Organization for Economic Cooperation and Development’s (OECD)’s long-term growth forecasts, the country’s average annual potential growth rate will decline to 0.69 percent in the 2030s from 3.09 percent in the 2010s and 1.89 percent in the 2020s.

The downward trend in potential growth rate continues, with a projection of 0.05 percent in the 2040s and minus 0.03 percent in the 2050s.

The biggest driver of low growth is stagnant productivity.

The potential growth rate is composed of capital, labor, and total factor productivity, referring to intangible effects such as technological development and management innovation.

According to the Bank of Korea, the potential growth rate for 2021-2022 was estimated at 2.0 percent, but since the 2008 financial crisis, total factor productivity has stagnated within 1 percentage point (0.9 percentage point), which means that even if money and labor are poured into the economy, technology and management innovation remains weak, causing a depletion of growth energy.

“The Korean economy has successfully shifted its structure to value-added and high-technology items, generating sustained high growth, but since the growth of the semiconductor industry, the transition to new industries is no longer rapid,” the Korean Economic Association said, emphasizing on the need for a policy overhaul to promote innovative growth.

The association also warned that the previous policy of concentrating on specific industry cultivation through research and development (R&D) support and tax benefits may distort the market. The association advised that policy should focus on creating an environment where innovative talents are not afraid of failure and can take on challenges.

“The government has mobilized various policy instruments to solve the problem of low growth, but it is getting worse,” the association said. “The private sector should take the lead in finding industries to drive innovation other than semiconductors, and an ecosystem transformation is needed to promote growth after startups rather than startups themselves.”